Ameena Majid and Cary Reid Burke of Seyfarth Shaw examine how companies should prepare response strategies to labor-focused shareholder proposals in advance of proxy season.

Dominance of environmental, social, and governance dialogue and framework has ushered in a new era of shareholder proposals by activist investors. The proposals have also shifted into dominant ESG topics that address how organizations manage their workforces.

Given the resurgence of union organization, these sorts of proposals will only become more prevalent (and likely, more aggressive). Companies that might be vulnerable to such proposals should prepare their response strategies well in advance of shareholder meeting season.

Until recently, most labor-related shareholder proposals were relatively benign. Typical proposals sought a pledge to abide by the International Labor Organization's principles to strive for healthy and safe workplaces that are free from discrimination, and allow for the freedom to associate and collectively bargain (the latter is protected concerted activity under the National Labor Relations Act). Now, many organizations voluntarily state their alignment with the ILO's Declaration on Fundamental Principles and Rights to Work.

Since the Covid-19 pandemic, institutional and activist shareholders have begun to take more aggressive (and pro-labor) shareholder proposals to the ballot. These proposals include asking organizations to refrain from opposing organizing campaigns or to forego secret ballot elections altogether in favor of voluntarily recognizing a labor union upon a showing of majority status. Another type of proposal requires submission to a third-party audit of labor practices-these proposals shed no light on how the audit would work in practice, what entity might conduct it, and the scope of the anticipated work.

While ESG's dominance is certainly a factor in the nature of the shareholder proposals, the Securities and Exchange Commission's change in posture to largely disallowing a company's request to exclude the proposal under the ordinary business exception has played a significant role.

Companies have responded in various ways when declining these proposals, ranging from outright rejection to sounding more conciliatory. Indeed, one company issued a measured, timely response that could serve as a roadmap for other organizations facing similar proposals, particularly for the first time. To start, the company explained that it values its relationship with its employees and outlined the ways in which it strives to be a great place to work. Perhaps more importantly, the company set out an alternative course of action that addressed the concerns the proposal laid out.

Of course, an organization's response strategy can and should vary based on risk tolerance, industry, and political leanings, among other things. Some companies that have expressed progressive values publicly or that are in traditionally heavily organized industries, for example, might determine that agreeing to a given shareholder proposal is best for business. Other organizations with more acrimonious histories with labor unions might buck up against such proposals or try more risky legal maneuvers to block them from consideration.

Regardless, response strategies should align with the company's broader ESG agenda and overall strategy to deliver shareholder value. Proactive approaches begin long before there is an indication that a proposal could be advanced and include:

Priority Assessments. Meet with key internal and external stakeholders to understand priority human capital management issues. Listening to and understanding the stakeholders' views, then directly addressing them in line with the organization's purpose, values, and business strategy are crucial first steps towards developing a congruent labor strategy.

Engage and Align With Investor Relations. The organization's employees responsible for labor relations, DEI, and human capital strategy should engage regularly with investor relations, both after and in advance of proxy season. This can ensure that key team members know the major investors and their concerns and that everyone understands and executes the organization's engagement strategy.

Know the Investor. Understand whether a shareholder activist is a single-issue activist or is advancing its own agenda that may not be aligned with the organization's business and ESG strategy for shareholder value. Conduct due diligence on this investor and its tactics with other organizations.

Develop a Business Case. Any labor or other human capital strategy should have a business case that is aligned with the organization's purpose, values, and larger business strategy.

Irrespective of industry, risk tolerance, or values, careful thought and preparation are the keys to successfully responding to labor-focused shareholder proposals. Indeed, companies must be prepared to demonstrate understanding of the issues. Beyond that, telling a credible and compelling story about how the company has either begun to address the concern or has the tools to do so effectively will prove crucial. Companies with questions about these sorts of proposals or response strategies ought to consult with able counsel.

Originally published by Bloomberg Law.

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